Federal and state governments run many social programs that support lower and middle‐income households. One cost of such programs is that they undermine the incentives and the means for households to accumulate savings. Effectively, they displace, or “crowd out,” private wealth‐building, particularly for non‐wealthy households.
As government programs for retirement, healthcare, and other needs have expanded, more private wealth has likely been displaced, and wealth inequality has grown. Leftists decry wealth inequality, but their efforts to expand government likely increases it. Larry Summers made this point at the Peterson Institute last week notes Ryan Bourne. Summers was likely influenced by Martin Feldstein’s pioneering studies that found Social Security substantially displaces private savings.
This displacement, or crowd‐out effect, was explored in a 2016 study by Baris Kaymak and Markus Poschke. They built a macroeconomic model of the U.S. economy to untangle the causes of changing wealth inequality over recent decades. What they found is that the main factor raising U.S. wealth inequality has been increased wage dispersion generated by technological changes.
In addition to that effect, Kaymak and Poschke found that the expansion of Social Security and Medicare has further boosted wealth inequality:
By subsidizing income and healthcare expenditures for the elderly, these programs curb incentives to save for retirement, a major source of wealth accumulation over the life‐cycle. Furthermore, since both programs are redistributive by design, they have a stronger effect on the savings of low‐ and middle‐income groups. By contrast, those at the top of the income distribution have little to gain from these programs. We argue that the redistributive nature of transfer payments was instrumental in curbing wealth accumulation for income groups outside the top 10% and, consequently, amplified wealth concentration in the U.S.
The economists estimate that the expansion of Social Security and Medicare caused about one‐quarter of the rise of the top one percent share of U.S. wealth in recent decades.
Social Security and Medicare spending increased from 3.5 percent of GDP in 1970 to 8.3 percent by 2018. Those are the two largest federal social programs, but other programs have likely added to displacement and wealth inequality effects as well.
The Medicare program is a bonanza of centralized economic planning, special‐interest lobbying, pricing errors, perverse incentives, low‐quality care, improper payments, and fraud. To paraphrase Lenny Bruce, Medicare is so corrupt, it’s thrilling. It is so corrupt, we at the Cato Institute just published a whole book — Overcharged — about how corrupt it is.* That book has a section called, “Medicare Part D: The Always‐Pouring Pitcher of Drug Fraud.” Overcharged recounts how “the passage of Part D is associated with a large increase in the average launch price of oncology products.” It quotes Senate Finance Committee chairman Charles Grassley (R‑IA) as saying, “It may be that some drug companies are taking advantage of government programs to maximize their market share.” (Gee, ya think?)
Today, the Senate Finance Committee will consider legislation that attempts to fix some of those problems by changing the way Medicare pays for certain prescription drugs. The specifics of the proposed changes are mind‐numbingly complex. They have been known to cause health care wonks to scratch their heads and non‐health care wonks to flee the room. If you want to read about the particulars in all their wonky glory, click here.
The most significant changes regard Medicare Part D. Many of these changes would be beneficial. Two of them — a redesign of Part D “standard coverage” and a cap on subsidies to drug manufacturers — would save taxpayers a projected $85 billion over 10 years. Predictably, the people to whom that taxpayer money would otherwise flow are trying to block those savings. (See “special‐interest lobbying,” above.)
We begin with some background on Medicare Part D.
Background on Part D
In Part D, willing enrollees pay premiums to private health insurance companies to manage their drug coverage.
Medicare subsidizes those premiums, generally at an amount fixed at 74.5 percent of the average plan bid. The enrollee pays the remainder of the premium, which can vary based on generosity of coverage and other factors.
The insurers negotiate prices with drug companies and Medicare pays insurers additional amounts based on the quantity of drugs enrollees use and those negotiated prices.
Medicare requires participating insurers to offer a “standard coverage” plan, for which Congress rigidly defines enrollee deductibles and cost‐sharing, as well as the rules for that second category of Medicare payments to plans.
Part D Coverage Redesign
The legislation would redesign and simplify the Part D benefit in three principal ways.
First, it would eliminate enrollee cost‐sharing above a specified amount. Under current law, responsibility for paying for an enrollee’s drug consumption changes as the enrollee’s total drug spending rises. But enrollees always pay for at least a portion of the cost. As depicted in Figure 1, enrollees pay 100 percent of the cost of their drugs up to $415. They then pay 25 percent of the cost of their drugs until their out‐of‐pocket spending reaches roughly $1,266. Then, they pay either 37 percent (generics) or 83.3 percent (brand drugs) until their total out‐of‐pocket spending reaches $5,100. (Here, federal law mandates a weird and temporary price reduction where we pretend the manufacturer is paying part of the price.) Beyond that point, enrollees pay 5 percent of the cost of their drugs, without limit.
President Trump’s budget yesterday provides the latest evidence of out-of-control entitlement spending. In the baseline projections, Social Security spending will grow 5.9 percent in 2020 and Medicare spending will grow 8.8 percent. Social Security will grow at a 5.8 percent compound annual rate over the coming decade, while Medicare will grow at 7.8 percent. By contrast, inflation is expected to average 2.3 percent annually over the coming decade.
Social Security and Medicare are the first- and third-largest programs in the federal budget, and they are pushing the government toward a fiscal crisis. Medicare spending this year, net of premiums, is $645 billion, while the second-largest program, defense, is $674 billion. But Medicare spending will surpass defense in the next year or two, and by 2029 Medicare at $1.36 trillion will dwarf defense at $787 billion, at least in the baseline projection.
Social Security and Medicare are not the only programs for the elderly in the federal budget. A chart from CBO’s latest update shows the share of overall noninterest federal spending going to the old. The share is expected to rise from 40 percent in 2018 to 50 percent by 2029. Spending on the elderly will create sustained pressure on federal finances and taxpayer wallets in the years ahead.
Center for a Free Economy president Ryan Ellis writes in the Washington Examiner that President Trump “has caved to the socialists” by proposing to set the prices that Medicare pays for certain drugs at a percentage of the prices that foreign governments set for those drugs:
Unfortunately, rather than fighting the socialists, the president has decided to become one with them — at least when it comes to prescription drugs. After spending most of this year rightly condemning governments in Europe and elsewhere for ripping off Americans by imposing below‐market price controls on drugs, Trump and [Secretary of Health and Human Services Alex] Azar basically surrendered to the price controls and announced we would be adopting them ourselves…
By letting the foreign price controls serve as a reference price control here, Trump has put us down the same path of scarcity and rationing all too often seen in the rest of the developed world.
The purpose of Trump’s proposal is indeed to reduce the prices Medicare pays for these drugs. Medicare currently pays much more for these drugs than government‐run health systems in other nations.
Beyond that, Ellis’s oped crystallizes everything conservatives get wrong about drug pricing and Medicare purchasing in general. A few clarifications:
- No one knows what the “right” price is for any drug. We need market prices because they create incentives that naturally and always push prices in the right direction.
- Medicare’s administered (read: ouiji‐board) prices are indeed price controls, but not in the usual meaning of the term. They do not restrain prices anywhere but within the Medicare program.
- Medicare’s administered/controlled prices are not market prices, any more than other governments’ administered/controlled prices are market prices.
- The Trump proposal would merely change the way Medicare comes up with the prices it pays for drugs. Those prices would not be any more “price‐controlled” after the Trump proposal than they were before. They would just be lower–if the proposal achieves its stated goal, that is, which may or may not happen (more below).
- Conservatives who argue Medicare should not pay less than it currently does for drugs need to address the paradox inherent in their argument that, in order to restrain government and have a free economy, government must spend more. In order to fight socialism, taxes must be higher.
- One cannot import a price control. That’s not how they work. A government can either impose price controls on its own populace, or not. It cannot import the coercion another government exerts on its own citizens.
Ellis is correct when he writes, “Markets do a much better job reducing drug prices than government price controls do, and they do it while making prescription medicines widely available to patients, as opposed to rationed due to scarcity.” But the end result of these misunderstandings and misconceptions is that conservatives end up crowding out markets and/by opposing efforts to reduce government spending. This is why the Left believes, with justification, that when it comes to health care conservatives are just a bunch of cronyists.
Another irony: the more likely impact of Trump’s reference‐pricing scheme is that prices in other nations would rise, which is exactly what Ellis says he wants.
Overcharged by Cato adjunct scholars Charlie Silver and David Hyman is the antidote to this strand of un‐conservative conservative thinking.
Conservatives are railing against dual decisions by the British government to prevent Alfie Evans’ parents from transporting him to Italy for further treatment, and to order Alfie’s doctors to withdrawal life support from Alfie, which they did, and which soon led to Alfie’s death. Conservatives are claiming this is what you get under socialized medicine: heartless government will override parental rights to pull the plug on your children. My thoughts on Alfie’s case are still tentative, but I think that’s a total misreading. The tragic case of Alfie Evans had almost nothing to do with socialized medicine.
As hostile as libertarians are to government, even we believe government can legitimately order the withdrawal of life support, and prohibit parents from moving a child to obtain further treatment, when that treatment would fruitlessly prolong a child’s suffering — i.e., when further treatment would be akin to torture. In such cases, the government intervenes to protect the child’s rights. (British law frames the decision in terms of the “best interests” of the child, but it seems to me that language clouds the issue and thereby unnecessarily inflames passions.)
There is no objectively right place to draw the line between cases in which the government should and should not intervene. But I don’t know anyone who thinks it never should. If anyone does make that argument, they’re just wrong.
There is plenty of room to argue about whether British law and courts drew the line in the right place here. It did not appear Alfie was suffering, but doctors could not completely rule it out. They all agreed that further treatment was futile, though. Is it torture to provide futile treatment to a kid who likely can’t feel pain?
The only way socialized medicine might have something to do with Alfie’s case is that decades of socialized medicine might have shaped the values and attitudes of the elites who make the ultimate decision about where to draw that line. It is not crazy to think that the incentives the British National Health Service creates to provide less care, and the stiff‐upper‐lip attitudes that lead Britons to tolerate queues and other forms of explicit and implicit government rationing all for the Greater Good, might influence where the elites draw that line. But if the influence of the NHS leads British elites to be more likely to pull the plug on Alfie, that is not obviously or objectively wrong.
Nor is it the only way socialized medicine might influence where elites draw the line. The U.S. Medicare program is a system of socialized medicine that imposes no constraints on medical spending or consumption. Decades of experience with it and similar socialized‐medicine programs have created a pervasive belief among U.S. physicians and policymakers that more medicine is always better. (Spolier alert: it’s not.) So if U.S. conservatives want to make the argument that decades of socialized medicine have made Britain’s elites too willing to pull the plug on Alfie, they must also confront the possibility that decades of socialized medicine have made them too willing to tolerate the torture of children like Alfie.
I don’t know what the right answer was in Alfie’s case. I do know Alfie’s case is not an illustration of the failures of socialized medicine.
I also know that advocates of socialized medicine have exactly zero right to complain about the ignorance of some opponents of socialized medicine, because socialized medicine also socializes the cost of ignorance.
And I know one more thing: there’s a hug and a pint waiting for Alfie’s parents, Tom and Kate, in Washington, D.C.
On March 30, Sally Satel, a psychiatrist specializing in substance abuse at Yale University School of Medicine, co‐authored an article with addiction medicine specialist Stefan Kertesz of the University of Alabama Birmingham School of Medicine condemning the plans of the Center for Medicare and Medicaid Services to place limits on the amount of opioids Medicare patients can receive. The agency will decide in April if it will limit the number of opioids it will cover to 90 morphine milligram equivalents (MME) per day. Any opioids beyond that amount will not be paid for by Medicare. One year earlier, Dr. Kertesz made similar condemnations in a column for The Hill. While 90 MME is considered a high dose, they point out that many patients with chronic severe pain have required such doses or higher for prolonged periods of time to control their pain. Promoting the rapid reduction of opioid doses in such people will return many to a life of anguish and desperation.
CMS’s plan to limit opioid prescriptions mimics similar limitations put into effect in more than half of the states and is not evidence‐based. These restrictions are rooted in the false narrative that the opioid overdose problem is mostly the result of doctors over‐prescribing opioids to patients in pain, even though it is primarily the result of non‐medical opioid users accessing drugs in the illicit market. Policymakers are implementing these restrictions based upon a flawed interpretation of opioid prescribing guidelines published by the Centers for Disease Control and Prevention in 2016.
Drs. Satel and Kertesz point out that research has yet to show a distinct correlation between the overdose rate and the dosages on which patients are maintained, and that the data show a majority of overdoses involve multiple drugs. (2016 data from New York City show 97 percent involved multiple drugs, and 46 percent of the time one of them was cocaine.)
Not only are the Medicare opioid reduction proposals without scientific foundation, but they run counter to the recommendations of CMS in its 2016 guidelines. As Dr. Kertesz stated in 2017:
“In its 7th recommendation, the CDC urged that care of patients already receiving opioids be based not on the number of milligrams, but on the balance of risks and benefits for that patient. That two major agencies have chosen to defy the CDC ignores lessons we should have learned from prior episodes in American medicine, where the appeal of management by easy numbers overwhelmed patient‐centered considerations.”
In an effort to dissuade the agency, Dr. Kertesz sent a letter to CMS in early March signed by 220 health professionals, including eight who had official roles in formulating the 2016 CDC guidelines. The letter called attention to the flaws in the proposal and to its great potential to cause unintentional harm. CMS will render its verdict as early as today.
Until policymakers cast off their misguided notions about the forces behind the overdose crisis, patients will suffer needlessly and overdose rates will continue to climb.
President Trump has nominated Alex Azar to be the next Secretary of Health and Human Services. Azar will appear tomorrow for questioning before (and sermonizing by) members of the Senate’s Health, Education, Labor, and Pensions Committee.
Here are 14 questions I would ask Azar at his confirmation hearings.
- Is Congress a small business as that term is defined in the Affordable Care Act?
- Colette Briggs is a four‐year‐old girl with aggressive leukemia who is about to lose coverage for the one hospital within a hundred miles that can deliver her chemotherapy. She’s losing that coverage because insurance companies are fleeing the Exchanges. What do you plan to do, what can HHS do, about this problem?
- What will you do to prevent drug manufacturers from using the regulatory process to corner the market on certain drugs so they can gouge consumers and taxpayers?
- HHS already publishes data on Exchange premiums and insurer choice. Will you commit to publishing a review of the growing body of research showing Exchange coverage is getting worse for many expensive illnesses?
- Does HHS have an obligation to encourage young, healthy Americans to pay the hidden taxes contained in the ACA’s rising health insurance premiums?
- How will HHS increase its efforts to educate Americans about all their options for avoiding the mandate penalty?
- Short‐term health insurance plans are an affordable alternative to increasingly costly Exchange coverage. Will you reinstate the 12‐month policy term that existed before this year, and allow short‐term plans to be guaranteed‐renewable?
- The previous administration issued rules making it generally unlawful to purchase or switch Exchange plans for nine months out of the year. The Trump administration has restricted this freedom even more, making it generally unlawful for ten and a half months out of the year. Should consumers be free to purchase and switch health plans when they choose, just like any other product?
- Will you require insurance companies to repay the “reinsurance” subsidies the Government Accountability Office found the Obama administration illegally diverted to them?
- Will you press the Food and Drug Administration to allow the sale of birth‐control pills over the counter, without a prescription?
- Medicare, Medicaid, and ObamaCare attempt to pay insurance companies according to the cost of each individual enrollee. If those complicated formulas really work, should government just give the money to the enrollees and let them control their health insurance and health care decisions?
Is Obamacare’s Independent Payment Advisory Board constitutional?
- Should seniors be able to opt out of Medicare without losing Social Security benefits?
- Will you end government encouragement of “abuse‐deterrent” opioids, which have not reduced overdose deaths and are borderline unethical because some are literally formulated to hurt people?